2008: less growth and new imbalances

Rafael Pampillón. Professor. IE Business School

6 February 2008

The global downturn has reached Spain, calling for serious structural reform and cutbacks in public spending to maintain levels of competitiveness.

The end of 2007 saw a general deceleration of the world economy. The forecast for world growth over the coming year is less than it was for 2007. This is due to the fact that in 2008 the two main driving forces of the world economy, the US economy and the eurozone, will continue to cool. We are in the middle of a financial crisis with a heavy rationing of credit and a high level of uncertainty regarding the direction to be taken by macroeconomic policies. In this context, the Spanish economy also shows signs of deceleration and future weakness, made evident in the heavy deterioration of the foreign balance, high inflation and lower growth in consumption and the construction sector.

The GDP generated by the Spanish economy during the third quarter of 2007 was 0.7% higher than the second quarter, which had been two tenths less than the previous quarter. A poor performance since you need to go back four years (third quarter of 2003) to find a quarter with a growth rate of less than 0.7%. We have come to the end of the road we began at the end of 2003, when the GDP grew and grew. Now we are on another road and the GDP is growing less and less. Accordingly, in the fourth quarter of last year, the year-on-year growth rate for the GDP may have fallen from 3.8% to 3.3%.

Future outlook

The figures available for the fourth quarter of the 2007 show the same cooling economy for Spain as for the second and third quarter. As far as consumption is concerned, the portfolio of orders for consumer goods is deteriorating, together with the demand for cars and confidence indicators offered by both the European Commission and the Official Credit Institute (OCI). This consumer confidence indicator prepared by the OCI hit a historic low in November. The heavy increase in inflation and high interest rates are having a negative effect on family purchasing power. In addition, spending on housing is slowing down notably, although perhaps it has not yet reached negative figures, as forecast for 2008.

Investment in business appears to be the soundest component of domestic demand and, for the moment, remains strong. Investment in consumer goods maintained a two-figure growth rate (11.2%) but its rate of progress fell by almost 2 points during the third quarter. The growth rate of investment in consumer goods will also continue to slow down next year due to a low increase in consumer demand, relatively high interest rates, difficult access to credits and an increase in production costs (labour costs, for example, which continue to rise).

As far as the labour market is concerned, the increase in inclusion in the social security system is also slowing down. The year-on-year rate for the first quarter of this year totalled 3.5%, but fell to 3.2% in the second quarter and to 2.9% in the third. During the fourth quarter, the deceleration process continued with a growth rate of 2.7% in October and 2.3% in November. The Active Population Survey for the third quarter also showed moderation in the growth rate of employment, at a time when the working population continued to increase to high rates. We are now in a situation where the creation of employment is equal to or less than the increase in the active population. As a result, unemployment is rising. Accordingly, the level of unemployment recorded by the Spanish Ministry of Work increased in October and November of last year. Unemployment will continue to increase in 2008 as a consequence of the lower growth of the Spanish economy.

Imbalances

For the year 2008, the Spanish economy is set to grow at a rate of around 2.7% and, in the final quarter, at 2%. Besides the increase in the number of unemployed, we will continue to suffer from another two imbalances. The domestic imbalance shown in the higher rate of inflation in comparison with the countries with which we compete and the heavy external imbalance which will generate a current account balance deficit of around 10% of the GDP in 2007. These levels clearly indicate that Spain is losing competitiveness. This loss can also be seen in the reduced share of our world and EU exports. Improving competitiveness and the foreign balance is only possible through price stability, which can only be obtained by greater containment of public spending, encouragement for competition, and structural reforms.

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